Timken Co (TKR) 2020 Q3 法說會逐字稿

Good morning. My name is Catherine, and I'll be your conference operator today. As a reminder, this call is being recorded. At this time, I would like to welcome everyone to Timken's third quarter earnings release conference call. (Operator Instructions)

Mr. Frohnapple, you may begin your conference.

Thanks, Catherine, and welcome, everyone, to our third quarter 2020 earnings conference call. This is Neil Frohnapple, Director of Investor Relations for The Timken Company. We appreciate you joining us today.

Before we begin our remarks this morning, I want to point out that we have posted presentation materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access this material through the download feature on the earnings call webcast link.

With me today are The Timken Company's President and CEO, Rich Kyle; and Phil Fracassa, our Chief Financial Officer. We will have opening comments this morning from both Rich and Phil before we open up the call for your questions. (Operator Instructions)

During today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the timken.com website.

We have included reconciliations between non-GAAP financial information and its GAAP equivalent in the press release and presentation materials. Today's call is copyrighted by The Timken Company and without expressed written consent, we prohibit any use, recording or transmission of any portion of the call.

With that, I would like to thank you for your interest in The Timken Company, and I will now turn the call over to Rich.

Thanks, Neil. Good morning, and thank you all for joining us for our third quarter call. Timken delivered a solid third quarter as we experienced sequential strengthening off the second quarter above our expectations across most end markets and geographies. Strengthening markets, combined with strong growth in renewable energy and the BEKA acquisition, resulted in sales up 11% from the second quarter and down just 2% from the third quarter of last year.

We delivered solid EBITDA margins of over 19% with good operating performance, positive price and the benefit of cost reduction initiatives all contributing to the results. Earnings per share of $1.13 was down just $0.01 from last year. We reduced inventory in the quarter and generated over $120 million in free cash flow. Overall, given where we and our customers were early in the second quarter, the third quarter was a solid rebound and strong performance by Timken.

To expand further on revenue, the trend of sequential strengthening that we began to experience in May continued through the third quarter. As a general statement, the markets that were the most depressed in the second quarter were the strongest in the recovery. Automotive, truck, India and off-highway equipment are all examples of markets that were extremely depressed in early Q2 and have been improving sequentially since then.

Our strategy to increase our presence in renewable energy markets continue to pay off with very strong year-on-year growth in both wind and solar again this quarter. China also remained a bright spot as the country continues to be significantly less impacted by the coronavirus than most of the rest of the world. India, defense, marine and ag were also solid in the quarter. The BEKA acquisition contributed about 3% to the top line. Outside of the markets just mentioned, most other markets were down year-on-year from mid-single to high-teen percentages. In total, revenue was down a little over 5% organically and strengthened sequentially through the quarter, which is a solid step-up from the second quarter and is indicative of the strength and diversity of Timken's product portfolio and market mix.

We have a few slides in the deck on renewable energy, which provides some industry forecasts on the global shift to renewables as well as illustrate where we participate in the market. 2020 has been an excellent year for our renewable energy business with strong growth in both wind and solar. Market outlook for 2021 has continued to improve, and combined with our penetration initiatives, we are planning for another year of positive organic revenue in both wind and solar in 2021 on top of 2020's record year.

We recently announced our new military marine contract, and we expect year-on-year growth in marine in 2021 as well. In other markets, customer engineering activity on new product platforms remains robust, with a lot of emphasis on energy efficiency and miniaturization. Timken is well positioned to win more than our share of new platforms in 2021.

Despite organic revenue being down, EBITDA margins were within 40 basis points of last year, and earnings per share was only down $0.01. We had a modest impact in the quarter of temporary costs and compensation actions, and we believe the quarter is largely indicative of our ongoing cost structure. Pricing remained modestly positive year-on-year and flat sequentially. We expect price in 2021 to be flattish.

From a cost perspective, the temporary cost actions related specifically to compensation reductions and furloughs were relatively modest in the third quarter, roughly $0.03, and are not expected to extend into the fourth quarter or 2021. However, there are other and larger temporary and volume-related cost reductions, such as travel and reduced plant headcounts, that contributed to results and will continue for at least the next several quarters.

From a structural cost perspective, we come into every year with a plan to reduce costs from acquisition integrations, our digital investments, our footprint transformation, our CapEx projects and our ongoing drive for productivity and efficiency improvements. With the onset of the coronavirus, we began to accelerate various initiatives and added an SG&A rightsizing initiative in the third quarter. We continue to have a healthy level of activities around reducing structural costs in manufacturing and SG&A. The bottom line is that we are confident that the reduced cost structure in the third quarter results is sustainable for the next several quarters. And we will continue to launch additional initiatives in 2021.

While we are not providing any specific revenue outlook for the fourth quarter due to the elevated uncertainty levels, we're planning for normal seasonality to end the year and to start 2021. A few more details on that outlook. First, as a reminder that our normal seasonality will be a modest sequential decline from the third quarter to the fourth in the 2% range. And then typically a larger sequential increase from the fourth quarter to the first quarter, despite a strong October, that is what we're planning for this year as well as to start 2021. With the level of uncertainty we are facing, the possibilities around that at the midpoint are wider than normal, but we believe normal seasonality is a good middle of the road for us to plan around and then move up or down as the situation develops.

Second point, we have not seen any change in demand from the recent uptick in coronavirus cases around the world. Customers continue to operate and demand has not been impacted. Clearly, there are risks that are beyond our control, but governments appear to be more focused on social restrictions than industrial restrictions, and we continue to take extra precautions to keep our operations safe and running.

As I said in my comments, revenue improved sequentially through the third quarter and that trend is on track to continue in October. We expect October to be slightly stronger than September and our strongest month since January. However, November and December are typically among our weakest months of the year, so sequential strengthening off of October will be a challenge.

My final comment on the revenue outlook is a reminder that we were a few quarters into cyclical decline when coronavirus hit. So now after the third quarter, we are at 5 quarters of cyclical decline in many industrial markets, which includes a lot of inventory destocking across multiple channels, all of which bodes well for a rebound at some point soon.

We expect cash flow to be solid in the fourth quarter and to end the year with a solid balance sheet, which brings me to capital allocation. Capital allocation remains a critical element of our value proposal, and we remain committed to our framework with CapEx and the dividend as the top priorities. We are on track to be back in position to shift from debt reduction to greater value creation opportunities in 2021, and we will have a bias to M&A with share buyback as a viable option.

M&A activity did return in the third quarter. Our most recent acquisition, BEKA, will hit its 1 year anniversary at the end of this month. Despite coronavirus, we've managed to improve margins several hundred basis points this year through the consolidation of Groeneveld with more margin expansion expected in 2021, and we are doing so while building a global leader in automatic lubrication technology.

In summary, Timken continues to perform well through a very challenging year. We are keeping our operations safe, serving our customers, delivering solid financial results including strong free cash flow and advancing our strategy to build a high-performing industrial leader. Phil?

Okay. Thanks, Rich, and good morning, everyone. For the financial review, I'm going to start on Slide 14 of the materials. Timken delivered solid performance across the board in the third quarter and you can see a summary of our results on this slide. Revenue for the third quarter was $895 million, down 2% from last year and up 11% sequentially from the second quarter. We delivered an adjusted EBITDA margin of 19.4% and adjusted earnings of $1.13 per share, just shy of last year's record third quarter earnings.

Turning to Slide 15. Let's take a closer look at our third quarter sales performance. Organically, sales were down about 5%, with most of the year-on-year declines coming in Mobile Industries, while pricing was positive in both segments. The BEKA acquisition added approximately 3% to the top line in the quarter, while currency was roughly neutral. On the right-hand side of the slide, we outline organic growth by region, so excluding both currency and acquisitions.

Let me comment briefly on a few regions. In Asia, we were up 29% in the quarter. Our sales in China increased significantly versus the prior year, due mainly to strong growth in renewable energy. Sales were also up year-on-year in India as the country continues to recover from the COVID-related shutdowns that impacted it in the second quarter.

In both North America and Europe, most sectors were still down versus the prior year, but the rate of decline improved meaningfully compared to the second quarter. Sequentially, we saw solid improvement from the April lows, and we benefited from a strong recovery in sectors like automotive and heavy truck, which were hit especially hard during the second quarter.

Turning to Slide 16. Adjusted EBITDA was $174 million or 19.4% of sales in the third quarter compared to $181 million or 19.8% of sales last year. The modest decline in adjusted EBITDA reflects the impact of lower volume and unfavorable price/mix as negative mix more than offset positive pricing in the quarter. Note that the negative mix reflects the significant growth we saw in OE sales within Process Industries, coupled with lower aftermarket and distribution revenue.

Currency also had a negative impact on EBITDA as we experienced transactional losses this year versus gains in the year ago period. And I would point out that this FX headwind more than accounts for the year-on-year decline in adjusted EBITDA margins. On the positive side, we benefited from significantly lower SG&A expenses, favorable manufacturing performance and modestly lower material and logistics costs. In addition, BEKA contributed roughly $4 million to EBITDA in the quarter, with margins around 13%. Excluding currency and acquisitions, our organic decremental margin in the quarter was only 6%.

Now let me comment a little further on manufacturing and SG&A. On the manufacturing line, we executed well in the quarter as our team responded to rapidly changing customer demand and delivered improved operating performance. We had slightly higher production volume in the third quarter versus the year ago period, which gave us better fixed-cost absorption, and we also benefited from ongoing cost reduction actions and other productivity initiatives in our plants. A significant reduction in SG&A expense reflects the ramp-up of structural cost reduction initiatives, lower controllable and discretionary spending and the benefit of some temporary cost actions that occurred early in the quarter.

On Slide 17, you'll see that we posted net income of $89 million or $1.16 per diluted share for the quarter on a GAAP basis. This includes $0.03 of net income from special items, driven mainly by pension mark-to-market income, which more than offset restructuring charges and other items. On an adjusted basis, we earned $1.13 per diluted share in the quarter, down $0.01 from last year. Our third quarter adjusted tax rate was 24% as our geographic mix of earnings produced a favorable change in our forecasted full year effective tax rate to 26% from the previous projection of 27%. We expect the tax rate to remain 26% in the fourth quarter.

Now let's take a look at our business segment results, starting with Process Industries on Slide 18. For the third quarter, Process Industries sales were $466 million, up 1.5% from last year. Organically, sales were down 0.6% as strong growth in renewable energy and positive pricing largely offset declines across other sectors, including industrial distribution. The favorable impact of acquisitions added almost 2% to the top line in the quarter.

Process Industries adjusted EBITDA in the third quarter was $115 million or 24.7% of sales compared to $119 million or 26% of sales last year. The slight decline in adjusted EBITDA reflects modestly lower organic volume and the unfavorable impact of mix and currency, mostly offset by the favorable impact of cost reductions, manufacturing performance and positive pricing. The decline in adjusted EBITDA margin in the third quarter versus last year can be attributed entirely to the sizable currency headwind in the quarter.

Now let's turn to Mobile Industries on Slide 19. In the third quarter, Mobile Industries sales were $429 million, down 5.8% from last year. Organically, sales declined close to 10%, reflecting lower shipments across most sectors, partially offset by positive pricing. Acquisitions added 4.4% to the top line in the quarter, while currency translation was slightly unfavorable. Mobile Industries sales were up 25% from the second quarter. We saw strong sequential demand in automotive, off-highway, heavy truck and even rail as customers ramped up production following COVID-related interruptions in the second quarter. Mobile Industries adjusted EBITDA for the third quarter was $68 million or 16% of sales compared to $72 million or 15.8% of sales last year.

Adjusted EBITDA margins were up 20 basis points compared to last year on lower revenue. The improvement in margins reflects the favorable impact of cost reductions and strong execution in the quarter, which more than offset the impact of lower volume. This represents a year-on-year decremental margin of only around 9% on an organic basis, very strong performance in Mobile Industries this quarter.

Turning to Slide 20. You'll see that our strong cash flow performance continues. We generated operating cash flow of $154 million in the third quarter and after CapEx, free cash flow was $124 million. CapEx in the quarter was $29 million and includes spending to support the growth opportunities Rich highlighted earlier. Our year-to-date free cash flow of $372 million, represents 150% conversion on adjusted net income. It's also $100 million better than last year despite lower earnings as we're benefiting from improved working capital performance, lower cash taxes, and lower cash used for medical expenses in 2020. Also in the third quarter, we paid our 393rd consecutive quarterly dividend and reduced net debt by roughly $80 million.

Taking a closer look at our capital structure. We ended September with a strong balance sheet. We have liquidity of greater than $900 million, which includes $313 million of cash on hand, plus over $600 million of availability under committed credit lines. Our net debt to adjusted EBITDA ratio improved to 2x at September 30, which puts us squarely in the middle of our 1.5 to 2.5x target range. Overall, our balance sheet, liquidity and expected strong cash flow puts in a great position to navigate the still uncertain environment, while continuing to drive our strategic imperatives.

Now let's turn to Slide 21 for additional commentary on the outlook. Rich provided some color on expectations for revenue in his remarks. So let me touch on some of the other items. In the fourth quarter, we expect to generate strong free cash flow and to further reduce net debt. For the full year 2020, we expect CapEx of around $125 million, or just over 3.5% of sales, and net interest expense of around $65 million, both roughly in line with our prior outlook. As Rich discussed, we continue to execute on initiatives to improve our cost structure and support our operating margins. We now expect to generate $55 million to $60 million of year-on-year cost savings in the second half of 2020, which is essentially the high end of the range we provided in early August, as we have better visibility now with just 2 months left in the year.

Finally, for the fourth quarter, we expect EBITDA margins to be modestly lower than the third quarter, reflecting the seasonally lower volume that Rich discussed. On the positive side, we expect margins to be quite a bit higher than last year's fourth quarter due to better cost performance. This includes the benefit of current year cost reduction actions and also reflects the fact that last year, we had some higher than normal operating expenses in the fourth quarter, which should not repeat. In addition, we expect BEKA's margins to be up in the fourth quarter versus last year.

So to summarize, the Timken team delivered strong performance in the third quarter as we capitalized on better-than-expected revenue, and we executed very well to deliver strong margins and earnings. We're demonstrating our ability to generate higher margins and returns through the cycle, while continuing to drive our strategy, and we're in great position as we look ahead to 2021.

This concludes our formal remarks. And we'll now open the line for questions. Operator?.

(Operator Instructions) We'll go first to Rob Wertheimer of Melius Research.

So obviously, some good and steady results. Really, the renewable side is becoming more material and pretty exciting. And I wondered if you could just give a little bit commentary, breaking down the growth either as -- whether you're expanding the geographies or new customers, the sources of growth and how that continues to expand. And then -- and Richard, for my other question would just be, as you look to next year, with the ability to deploy capital, given what you've proven out this year, how much do you factor in your own stock price when you sort of think about the trade-offs on acquisition?

Yes. So on the renewables side, really a breakout year for us for probably about a decade of activity in this space on wind and a couple of years on solar. And clearly helping to mitigate weakness in other markets. It would have been great if it would have been additive to other strong markets. As we've really built what I would say is a full bearing portfolio. If you look back 10 years ago, we really weren't in the turbines. Then we really started in the gear drive, which was our, I'll say, our technology sweet spot, and then we've really expanded across the entire platform with a range of bearings now up to several meters in diameter.

I would say, our pipeline of -- this is mostly OEM revenue for us, and it's engineered-to-order product. It's not something that's substituted. It's not something -- like if you're in the design, you're going to be in the design for some period of time. I would say our forward-looking platform wins over the next couple of years is stronger than it's been at any point in time. So I think the -- our penetration in the growing market is going to continue to improve. And then we knew this year was set up to be a big year, particularly in China and Asia. That's happened. We had a little concern about Asia leveling off or declining a little for next year. That situation has improved through the first 3 quarters of the year. Our backlog is strong to start next year and really out probably through the middle of next year.

We continue to be, I'd say, disproportionately weighted towards Asia from an end market mix with China being the predominance of that. The -- China has been very consistent in their commitment to moving more to renewable energy, and it's been less erratic, I'll say, than the U.S., followed by Europe and then followed by the U.S., but we have presence everywhere. I think the other thing that we've really done in the last couple of years and it's going to be even better in the coming years, we used to be pretty concentrated with a couple of gear drive manufacturers and a couple of turbines. We really have some level of content across a much wider swathe of OEMs and platforms in the coming years. So I think it's going to continue to be a higher and higher percentage of The Timken Company's revenue and is a really good secular growth story.

And then longer term, we are seeding an aftermarket. That aftermarket is probably 10-plus years out, but there will be a significant aftermarket revenue stream that starts to kick in, probably more so for Phil and I's replacements at some point in time than us. It's a ways out there, but it started and we'll continue to triple up, but the OEM is going to dominate that.

On the solar side, we really moved into that market first with the acquisition of Lovejoy several years ago in a small way, and then moved in it -- well, I said -- let me go back to wind. The other piece of wind, the BEKA acquisition moved us into a leadership position in Asia in lubrication systems. The difference with lubrication systems versus bearings, there's not an enormous amount of dollar content on a lubrication system than a wind turbine as compared to bearings. So the upside is certainly not there, but it's still an attractive growing part of the business. And then organically, we're working on some of the other product platforms that we have with Lovejoy and PT Tech to expand our presence there as well.

And then coming back to the solar side, moved into it in a small way with Lovejoy. Moved into it much bigger with PT Tech -- or with Cone Drive acquisition. And we are a leader in those precision drive systems. There's not a lot of moving parts on solar, but where there are, we have a significant amount of content. Again, similar comments that -- probably a little less visible, it's a little shorter sales cycle than wind. A little short of the technology cycle than wind, but feel very good about 2021 that we will have an increased presence there. And again, the market outlook is pretty solid. That business is very global. We have installations that -- the direct customers are heavily in Europe, but the installations are very global, very project oriented. And again, the outlook for 2021 stays very strong.

And Rob, I didn't catch the last part of your question about that versus M&A.

Yes. Thanks, Rich. So that was a very comprehensive answer, and it's pretty exciting what you've done. Question was just -- I mean you've accomplished a lot this year, your stock price is not super high. And I wonder, just philosophically, how you weigh buyback versus M&A? You mentioned the preference for M&A, I don't know whether the valuation comes into play or not.

Well, valuation definitely comes into play and certainly agree with your comments on our stock price and certainly believe that share buyback is -- well, share buyback's very accretive and makes the bar for M&A high. That being said, I think the results that we are delivering this year would not be what they are, had we not -- had we sat out completely in the M&A market the last few years. So we always look at the comparison. We have the bar established for that. And I think the likely answer going forward is going to be some of both, like it has been looking backwards.

We will now take our next question from Steve Volkmann of Jefferies.

Can we -- I think you mentioned, Rich, a couple of times in your comments about distribution, industrial distribution. Can you just dive into that a little bit more for us? Are you seeing that business improving as well? How do you think the inventory situation is there? And do you think '20 -- to your comments about 5, 6 quarters into a downturn, is '21 potentially setting up for more of a restock year in distribution?

Yes. So I would say distribution was among our weaker sequentially performing parts of the business from Q2 to Q3. Part of that was it declined later. It held on well into April and the decline was a little later. So the second quarter was not as weak as automotive and truck and some other markets. But we really didn't see globally net any strong improvement. And I think for us, much of that is due to destocking. So as you look at our U.S. distributors that are public it's a benchmark of that. They both lowered inventory in the quarter, and their sales were down low double digits. So when you compound low double digits with some inventory reduction year-on-year for us, it's pretty weak. We expect further inventory reductions in the fourth quarter.

We don't think inventory is way off, and they made those comments as well publicly that -- but they continue to see some slight greater sell-through than purchases of some inventory reductions. So we see that likely for the fourth quarter as well. And I think it depends on demand. But certainly, the opportunity, I think, is greater for restocking than destocking as you get past the first quarter of next year in those channels.

Okay. And does this sort of surprise you at all? Because I know you've seen other cycles, but the kind of consensus around all these end markets as things are improving kind of quarter-over-quarter, month-over-month, and we've heard a fair amount about some hike levels of inventory in some of the end products through this, and yet we seem to be destocking in the channel. It just seems like there's a disconnect there.

Well, certainly, one of the things that's different this time is the disparity where if you really look from the full channel, we have restocking happening, I think, in automotive. We have restocking happening in truck. I believe we'd start to see some -- saw some restocking in the third quarter in ag. But then we have destocking in probably general industrial distribution, rail. So I think we have more have and have-nots within that.

But no, I don't think so, Steve. Because I think the decline that we saw in revenue of end-use of our products and the idling of factories around the world and reduction. And I think that was a real reduction in demand for a period. And inventory generally has to come out for that. I think if it extended much beyond early into next year or really even much beyond the end of this year, then I think it would start to be unusual in its duration.

Steve, this is Phil. The only matter I would add to what Rich said is we did see in the quarter globally, our order book in distribution was up slightly year-on-year, obviously up a lot sequentially. But so we -- to Rich's point, we do feel like while there may be some further destocking here through the end of the year, we do think inventory should be hopefully in decent shape and set us up reasonably well for 2021.

Our next question will be from Joe O'Dea of Vertical Research.

I wanted to ask about the setup over the next couple of quarters and talking about more or less normal seasonality. And so some stabilization after a Q2 decline, Q3 bounce back. And what do you think we need to see in order to kind of trigger the next wave of recovery off of these levels? I would think from an end market puts and takes perspective, that you're looking at more tailwinds than headwinds here. I'm not sure if there are any end markets that stand out as ones that you would see a little bit of pressure next year. But really what we need to see in terms of getting that next stage of recovery growth underway?

Well, I think we clearly have net momentum. As I said, the sequential strengthening has been there since May, continuing through October, and I would not consider a slight decline in November and December as a slowdown of that. So I think how you start the year would really be the determinant of that. Certainly, as all of you know, these are -- a lot of these markets, truck and off-highway markets, they're momentum markets. Once they start moving sequentially in the right direction, they tend to move in that direction for multiple quarters and/or years, not a quarter or 2. To Steve's point, could this be different with coronavirus? It could be. But I think as we sit here today, our world is set up that we think we're going to grow sequentially from the fourth quarter to the first quarter and that this momentum will continue.

I think it's a little more tepid than probably what would be given the depth of where we went in the second quarter, largely due to some pretty weak -- a weak consumer economy, unemployment and all the things, obviously, that are out there plus the risk around coronavirus of resurging here in the winter months. But I think in general, you look across our markets, the momentum has been favorable for 5, 6 months, and is largely set up to start 2021 favorable.

Got it. And then I wanted to ask one on the cost side of things. It sounds like in terms of the temporary costs that are out, that those will be managed out over the next couple of quarters or so. As you think about the kind of the scenarios in which those costs start to come back, do you anticipate bringing them back in a way that normal incrementals are still achievable? Or is it a matter of some of these cost cuts will make normal incrementals in a recovery scenario a little bit harder to achieve?

Let me probably give a longer answer that -- than what you asked me. As we break down our costs into various buckets, first, we do a lot of work every year to increase the variability of our cost structure. And this work has been ongoing for well over a decade. I think we're better at it today than we were in the 2015-'16 period, and we were better at it '15-'16 than we were in '08-'09. And it's everything from the vertical integration, flexing the labor cost and the plants, our incentive compensation, system design, the cyclicality of our material cost structure. And just a relentless focus on moving more fixed cost to where there's some level of variability in them. So that's the biggest part. That's the most important part as you look at our cost to good decrementals. And again, I think we're better at it. That being said, there is definitely some compression there, things that we can't flex. And those costs largely all come back when volume comes back.

And then as we talk about temporary cost reductions, I'd break that down into 2 pieces. There's what will really be the extraordinary things we did at the depths of the coronavirus situation around compensation and furloughs. Those are over and would not be expected to repeat it all. And that is what I was referring to as really a fairly small impact even in the third quarter. So I'd largely say they were over in the second quarter. They were big in the second quarter, small in the third quarter and largely over.

There's this other part of temporary coronavirus costs, which I think is really where you were getting at travel, controllable expenses, some part of our head count that we've gotten tighter on just as we -- and more cautious on as we've gone through this period. That is where I really don't see any of that coming back in the next couple of quarters. Travel is a big part of that as an example. And our travel is probably going to remain closer to 0 through the next 2 quarters than it was prior to the coronavirus. So to your point of how that comes back, I think there's -- some of that remains to be seen, but certainly, we will have control of that, and we'll make sure we have some volume coverage for that as that happens.

Using this meeting as an example, I probably used to do 80% of my IR work face-to-face. I'm doing 0% of it face-to-face now. Where will I be a year from now? Probably not 80%, probably not 0. So there'll be some probably permanent savings on that. And that permeates, I think, a lot of these things. So we're really dissecting a lot of that to figure out how much of that we can capture permanently. But I would also tell you, in the next couple of quarters, it's not coming back. So -- and that's even -- I think the volume continues to improve.

And then there's the piece that I talked about with the structural cost savings, which I think we went into. So I think we're going to control any cost coming back in. And I think it's probably 2 or 3 quarters away before that's a material amount off of the third quarter. So that was the long answer.

And our next question will come from Steve Barger of KeyBanc Capital Markets.

Just going back to the renewables, do you build your own industry forecast? Or are you using a service? And could you tell us what either you or they expect for a kind of 3- or 5-year growth rates for renewable installations?

I would say we certainly use external, but we really use more customers because it really matters much more what content we have and which customers are on and which geographies we're on. And these are -- this is probably one of our longest lead time firm order book items that we have. So when we typically have quarters of firm backlog and visibility to business that we don't have today that we may not start commercializing for 12 months, 18 months.

So definitely, our internal data is more relevant, but then we use a variety of external benchmarks off that. In I think the numbers that we showed you there of the 8-ish percent, I think, is a pretty good benchmark for us over time. But it has not been a linear progression for us as we've moved into the market and would expect it not to be linear going forward.

There hasn't been any major pullbacks, but there's been some pauses as we've been in the market now for a decade plus. But next year, again, with where we participate pretty bullish, I don't think -- it certainly won't be the same level of percentage that we did this year. This year was -- we had some significant capacity come online. So new platforms come online. And then also a good market. Next year, we have the same, but not at that same level of magnitude. But we will have another round of CapEx planned for next year that will put us in position for the next couple of years.

Okay. Can you tell us what your average content per turbine is? Or what -- and what it can be if you're selling the whole bearing and lubrication product suite?

No -- well, one, it varies quite a bit depending on the size of the turbine and then how much we participate in that turbine. And I would say it'd be rare for us to have every application across the turbine. Typically it's split amongst us and some competition. But it's tens of thousands of dollars to 6 figures.

Got it. And similar question for solar. I know there's less content there, but is it content per panel? Or content per megawatt? How do you even think about -- or how should we think about measuring content relative to growth rate?

Yes, it's dramatically smaller on solar. And one, it's not in every solar application, some solar applications are fixed, although the premium commercial ones generally have precision motion control devices. So now you're talking to $1,000 to $10,000 and it would be more per panel as the graphic that we have in the deck illustrates, and then there will be some conversion.

So I think Steve, I think our intent in the -- in our next investor time is to give you a lot more information on both of those questions. We wanted to dip into it today and affirm our confidence in it. But I think both your questions are fair in terms of relating our revenue back to actual unit of energy. And we'll come back to you in the next couple of quarters with more information on that.

We will now go to Joe Ritchie of Goldman Sachs.

I just wanted to try to understand the trends a little bit better. I know that you talked about sequentially, revenues being down a little bit in the fourth quarter versus third quarter. But you also stated that October was, I think, the best month since January, and I know there's 3 less selling days also in 4Q. So is there any color that you can give us around like kind of like the magnitude around how trends have gone across your business and particularly in October?

Yes. Again, I would say it varies, but net we have positive momentum and had positive momentum since the May time frame. And I think when you factor in holidays and shipping days of November and December, a flat to down a couple of percent from Q3 to Q4 would actually still be positive momentum. Just the shipping days alone are close to 5%.

So -- but that being said, it's not equal. We're not expecting sequential strength in distribution from Q3 to Q4 as an example because we think we'll see some destocking there. And we did see really the sequential strength from September to October there. But particularly automotive -- particularly, I would say, more of the Mobile markets are continuing to strengthen. And then we've got some secular growth stories in there as well in regards to renewables. So I would say it is positive market momentum being mitigated by fewer shipping days, year-end holidays and a normal seasonality.

Yes. That's helpful, Rich. And I guess maybe just following up on that one comment, and I know we've talked about it a little bit here on the destocking trends in the fourth quarter. I guess, just given that we have been in a period of destocking for quite some time and seen negative growth for several quarters now, it's curious to me that we're still in this destocking mode with the distributors. So what is going on with them specifically? Any other color that you can provide there on distributor destocking trends in the 4Q?

No, I don't think so. I think -- I guess, we'd say it's modest. These are -- their sales year-on-year are down 10%. Our sales to them are down 11% or 12%. It's -- these are not huge swings in their inventory. One of our customers made some comments on their call this week as well about they've invested a lot in information technology and improved digital connectivity with their suppliers, one of which would be us. And they and us manage inventory better.

So I think it's largely -- if sales are 10% lower, you need less inventory to support that. And therefore, that inventory has to come out and our sales have to be a little lower. So I think it's just a normal tail -- on the flip -- you were talking about the distribution side, but there's also been pretty heavy destocking in some of our off-highway channels. For us, we really started experiencing that last year significantly in the fourth quarter. Our customers are talking about it more impacting them now in the third quarter and fourth quarter.

But for us, we're actually on the other end of that where we're starting to see our sell-through to them -- the after-sales level are a little greater because we took a lot of that hit last year and then in the early parts of coronavirus. So it varies. And to the earlier comments, I wouldn't say that there's anything abnormal happening, except for the 3- to 4-month period that was extremely abnormal in the earlier part of this year.

Got it. And maybe one real quick one for Phil. The $55 million to $60 million in savings in the second half, how much came through in the third quarter? How much is expected in 4Q?

Yes, great question. You think of it as pretty close, maybe slightly below half in the third quarter and maybe slightly above half in the fourth quarter, but reasonably close. And as we talked about before, we think the full year effect of those savings next year will -- that, plus some other initiatives we're working on, should essentially mitigate the absence of the temporary actions next year. So while year-on-year comps will be a little bit messy just given everything that went on in the second quarter, but we do think for the full year, I would not expect the temporary cost actions that we did this year to be a headwind per se. We think we ought to be able to fully offset it.

We will now go to Ross Gilardi of Bank of America.

More renewables questions, but I'm guessing you guys are happy to talk about this business all day right now. You gave that -- a couple of those great slides, and you showed 12% of sales in 2020. I mean this is a $400 million business right now. It looks like -- I didn't quite break out the ruler, but it looks like it's more than doubled in the last 2 years. Tell me if I'm wrong. And what I'm wondering is can this be $1 billion business in, I don't know, 5 to 8 years? And is the manufacturing capacity distinct from it? And can you present it to -- as a separate sort of stand-alone business? And any thought being given to breaking it out as a segment at some point because clearly, this is a business that's growing way faster than anything else in the bearings industry right now that it probably warrants a much higher multiple.

Well, a lot of interesting thoughts within that, I would say, first on your breaking out the ruler, directionally, yes, and that was what would the slide was intended to be directional. We've made some significant investments in -- and they're delivering this year, and we expect them to for years to come. And I think directionally, yes, I think this is a business we think we can keep a double-digit-type CAGR on for some time, which of the numbers that you just rattled off there, would get to be a pretty sizable part of the company in the next 5 years.

I would say we have really even contemplated the segmentation question. And it would probably be quite a bit bigger before that would be a valid discussion. But certainly, I think to the questions you just raised, the questions from Steve earlier, et cetera, we need to provide more color on what we're thinking about it, what we're going to be investing in it and what the growth of the industry is going to mean to The Timken Company in the coming years. And we do plan -- we certainly do plan to do that with today being a small step in that direction. I think I answered all your questions. Did I leave any there, Ross?

No, that's great, Rich. I mean can you comment at all with -- what do you think your share has gone over the last 3 to 5 years for all the -- particularly in wind?

Well, it's -- it varies. In the gear drives, I would say it's quite high. But certainly, we still have a couple of large competitors out there. But we, I would say, are 1 or 2 in the gear drives space. On the main shaft, which tends to be the 2-meter or 3-meter, very large bearings, we're still actually very small. We were 0 not very long ago, and we've broken into double digits. But we're still third or -- for where we participate, we're third. We're not really in Japan. So I think there's still a lot of upside there. A lot of the CapEx that we put in this year and that's planned for next year is in that space. And I think there's room for us, both from a share perspective and in a market perspective.

Yes, Ross, this is Phil. I would just add to Rich's comments. The vast majority of our growth this year in wind would have been more on the gear drives than the main chip. But I think with the investments we're making in technology and footprint, I think we're in a great position to -- for that to be the next really good story for us. And wind is increasing our penetration and share on the main shaft, which is the longer cycle, quite frankly, the longer cycle of the 2 portions of that business on the bearings side.

So I know one thing it might have been...

It is a -- I'd also say it's a concentrated industry, right? There are a -- it's not the longest list of customers and the same thing with competitors. So -- and we have competitors and they're formal competitors, but it's not a long list of companies that have the technology to do what we're doing.

I would just -- the only other thing I'd ask is, do you have separate capacity for the wind business in particular? Or is it co-mingled with the rest of your footprint?

Well, it's largely a size issue. So certainly, when you get up to bearings 2 meters and above, there's not much of a market -- particularly precision bearings. Typically, when you'd be up to that size, you might get something in a marine application or something, but they would typically be a lower precision bearing. So when you get the precision bearing of that size, it is largely dedicated manufacturing technology.

You get to the gear drive size as -- that Phil was alluding to is a big part of our growth. Those are sized bearings that would be in steel mills, would be in other large industrial, some mining equipment applications, et cetera. So they're not unique, but it has become such a sizable part of the bearing industry that it's also -- the growth in it is made at the largest part of that industry, whereas 10 or 20 years ago, it would not have been.

And now we'll move to Justin Bergner of G research.

Just on the renewables quickly, a lot has been hashed out. When I do the math and look at the bars, it looks like there's about 50% growth in 2020. I guess there's some contribution inorganically from BEKA. Just am I sort of in the right ballpark there? And you did say that you're expecting further growth in 2021?

In the right ballpark. And yes, further growth in '21. Not at that same percentage. It would be a lower percentage.

Okay. Great. Switching to the price cost side. You mentioned -- I think, you expect flat price in 2021? Or was it flat sort of price cost?

My comment was flat price. And obviously, we've got a lot of self-help on the cost side, not ready to call the -- I'll say, the more variable part of the cost side of the cyclical cost of steel cost. But with flat price, I think price cost could be positive, with the exception what Phil said, we've got the onetime benefit of the second quarter to be a little bit messy. But for the year, we think we could eke out a little bit of price -- positive price/cost.

Okay. And then lastly, just on the destock-restock dynamic, it seems like you still expect across the system sort of slight destocking in 4Q. But if the destocking is coming down in 4Q and sort of, call it, flat in 1Q and shifting to a restock thereafter. So it seemed like normal seasonality would actually be equivalent to a very weak recovery because the destocking-restocking trend is starting to shift, even if it's still negative. Is that accurate?

No, I don't think so because I think if you look back at particularly the end of '16, which was when our markets inflected off of a tough '15 and beginning of '16. And then you look at '17, where we had broad-based market strength, a really strong Q3 to Q4 for us would be flat to up 1% or 2%. And so again, just this seasonality impact of -- it's pretty hard to overcome. So -- but then you look at what we did from the first quarter of those. If you're, say, down 2 to flat Q3 to Q4, you look at Q4 to Q1 in the last 4 years has been plus 2, which was not a strong market going from '19 to '20, plus 7, plus 12 and plus 7. So I think the Q4 to Q1 is more indicative of the strength of the markets.

And we will now take our last question from Chris Dankert of Longbow Research.

Just kind of wanted to dig in here again. I know it's a difficult question, but is there any way to kind of quantify if the cross-selling benefit we've been seeing from, including Diamond and Lovejoy, kind of expanding further into power transmission over time? Or perhaps another way, just how have these past acquisitions been performing versus expectations maybe?

Well, I think, Chris, it's a great question, and it's really one where -- obviously, one of the big synergies we look forward in adding products to the portfolio is the opportunity to cross-sell. So Rich mentioned, the relationships we have with the wind turbine manufacturers and the gearbox manufacturers puts us in a position to bring the lubrication systems that BEKA's so known for into that space, which then gives us, obviously, more revenue opportunity. With Chain, we've talked about the opportunity to take Diamond, which is a premier brand in North American distribution, combine it with our drives business and really take it to the next level with both distributors and even reseating some of the installed base with OEs.

Belts was a great story where we were able to take what was a predominantly OE business with our industrial power transmission belts, take it into distribution, where every time -- every sale we make in distribution is a really nice mix of opportunity. And I think the list goes on and on. It varies by product. I think you've hit the nail on the head. I think the couplings, the chains, the belts probably provide the closest lubrication, obviously, the closest synergies with our bearing product portfolio.

The linear motion is a little bit different, but still some nice opportunities there as well. And then obviously, on the gear side, now we've got not only the premier pure services business in what we think in the world in Philadelphia Gear, we've also got Cone Drive in its product portfolio as well as the marine business we've been building and continue to add on to.

So it is clearly part of the value proposition. We're seeing it. It's one where it's not a lot of home runs. It's a lot of singles and doubles, but our teams around the world, when they go to visit customers, they're bringing the entire Timken portfolio with them, making joint sales calls where they need to and we're really excited about what we see. We think we're probably still in the early to mid-innings of this opportunity. And I think there'll be a lot to look forward to over the coming quarters and years.

I would just add, it's been a pretty powerful combination. It's not -- again, with our business model of the opportunities we're seeking, to Phil's sports analogy, it's singles and doubles, not home runs. And it also takes a little time. And a lot of it's, again, over time, when you get the digital connectivity done where the -- on the same CRM system can consolidate shipments, et cetera. I would say it's pretty powerful.

Got you. And again, I guess just last one for me. Renewables in China, obviously, an incredible story for you. But you mentioned that China was up year-over-year -- or excuse me, India was up year-over-year as well. And if I'm remembering correctly, that's more heavy truck, off-highway focused. So is that the demand that's returning in India?

It is. I would say the third quarter of last year was an easier comp than the first half. So we had that. And then also, India has become a renewable energy market for us as well. So I would say the India market was solid year-on-year, but probably the growth was renewable driven.

And with that, ladies and gentlemen, that does conclude our question-and-answer session. I would like to turn the conference back over to Mr. Frohnapple for any additional or closing comments.

Okay. Thanks, Catherine, and thank you, everyone, for joining us today. If you have any questions after today's call, please contact me. Again, my name is Neil Frohnapple, and my number is (234) 262-2310. Thank you, and this concludes our call.

And again, ladies and gentlemen, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.